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What Euronext means for local brokers

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Napoléon once said, “France needs me more than I need her”. Looking at the performance figures of Euronext and the Paris Bourse for 2000, one is left to wonder who needs whom the most.
The statistics announced show, as was suspected all along, that Paris is the engine driving Euronext, but also that turnover has been spectacularly increased across all trading areas. The pan-European stock exchange resulting from the merger of Amsterdam, Brussels and Paris exchanges, saw business reach new records on all markets in 2000, with trading up 15 to 110%, depending on the products. Trades through Euronext orderbooks totalled e1,706.67bn in 2000, 58.99% more than the e1,073.44bn recorded in the previous year. Trades totalled e128.09m, showing a rise of 58.31% from e80.91m in 1999.
Interestingly, when we turn to the Paris Bourse we also see full-year growth at around 60% following busy end-of-year trading. An average 404,316 trades were made each day in December, compared with 362,624 in November, a rise of 11.49%.
The busiest day was December 20 with 501,910 trades, and the least busy was December 28 with 361,398 trades.Trade value averaged e5.06bn a day during the month, compared with e4.62bn in November, a rise of 9.52%.
All this activity allowed Euronext Paris to announce record results for 2000. Reported trades totalling e1163.85bn during the year to December were up 61.4% on the previous record, set in 1999. The daily average reached an all-time high of e4.6bn for the 12 months.
A total of 141 new companies were admitted to Euronext Paris during the year, up from 111 in 1999. These included 16 on the Premier Marché,
18 on the Second Marché, 52 on the Nouveau Marché and 55 on the Marché Libre. Together they raised e11.7bn. This meant capitalisation of French equities on the Premier, Second and Nouveau Marchés totalled e1,541bn at December 31, 2000.
The emergence of Euronext, whose own market capitalisation places it at number two in the league table of European exchanges, will doubtless have a major impact on the Paris operation once the full trading platform is in place. It is not only the results that are impressive, however, but also the technical developments that have been keeping pace. In January 2000 the Bourse joined forces with Atos, a leading IT services company, since re-named Atos Origin. Atos Euronext, the emergent company, was charged with developing and marketing Euronext’s trading and clearance systems. At the time, Bourse chairman Jean-Francois Theodore was very bullish about this new strategic alliance, but many observers were keen to see the new systems operating before they were happy to give full approval.
Clearing 21®, which will be the common clearing system used by
Euronext markets in Amsterdam, Brussels and Paris by the end of the year, has been operational on Euronext equity markets in Paris since January 12. Already up and running on Euronext Paris derivatives markets Monep and Matif since September 8 last year, Clearing 21® is a recognised industry standard developed jointly by the Chicago Mercantile Exchange and the New York Mercantile Exchange. The Paris Bourse acquired the system in 1997 through a technology exchange agreement which also enabled the CME to adopt NSC, the Euronext trading system.
Following three years of development work conducted by teams from Clearnet and Atos-Euronext, Clearing 21® claims to be the world’s only real-time clearing system for both equities and derivatives.
Clearnet is to act as the clearing house and central counterparty for markets in Amsterdam, Brussels and Paris following a merger with Euronext clearing houses in Amsterdam and Brussels. It will thus be the first clearing house to process cross-border transactions in real time for both equity and derivatives markets.
The impact of Euronext on the Paris exchange has necessarily been limited as the full trading platform is not yet in place. Last month Euronext announced a delay in the launch of the platform in Brussels, although all three centres are expected to be up and running by the end of the second quarter. What will happen then to local brokers?
So far as the larger French stocks are concerned, around one third are held by foreign investors. This figure has been relatively unchanged over the past six months. Christian Hodara, head of law and compliance at Merrill Lynch in Paris, believes this has helped to drive changes in corporate governance in France. “The rule book is getting written for Euronext, and we know there will be a new type of orderbook. Once the full trading platform and single order book is in place, we will see some firms taking advantage of their local membership to trade across Euronext.”
Hodara believes that this will have a major impact on some of the smaller members of the Paris Bourse. “It will mean that they have access to the three markets for the price of one, once the clearing system is in place.” He believes that international clients who are already using French brokers will continue to do so. Nevertheless, logic suggests that an international institution dealing with local brokers in Paris, Amsterdam and Brussels will want to consolidate the contacts, but does that necessarily mean that investors will look to the larger international firms?
Bertrand Guillmog at the brokerage house of De Portezamtarc in Nantes says this need not be the case, and puts forward the argument for further co-operation between firms across Europe. “We deal in the small caps on the Paris market and so the international firms are not really our competitors. However, it is clear that in the future all this may change as our clients have access to a wider market through Euronext.”
To maintain their share of the market he believes that there may be an argument for collaboration with similar firms in Brussels and Amsterdam in order to “channel the information we all have across the wider market”. In this way, he believes that the smaller firms can compete, especially in terms of costs. “Most of the larger brokerages steer clear of the small caps for fear of not turning any profit, and I am sure we will be able to develop a niche market, involving consolidation deals between brokers.”
There is little doubt that the initial impact of Euronext is going to be among the large cap stocks, and this is where institutions are likely to turn to international investment banks. The impact on French brokers is likely to come later, as more foreign investors take an interest in small to mid caps across Euroland.
But is the idea of co-operation between brokers in the three centres of Euronext necessarily the solution? Surely the whole concept of Euronext is based on the principle of cross-border trading, removing the necessity for a presence in each of the centres. Consequently firms should be developing their research desks to cope with this. Guillmog will argue that because of their size the only way for them to compete is to develop loose partnerships, but can such alliances provide a service to compete with the international houses? We are likely to find out the answer to that during the second half of the year.

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